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Welfare of Competitive Price Discrimination with Captive Consumers

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  • Yanlin Chen
  • Xianwen Shi
  • Jun Zhang

Abstract

We study the welfare effects of price discrimination in a duopoly market with both captive and contested consumers. Using a unified information design approach, we characterize the best and worst market segmentations for producer surplus, consumer surplus, and social surplus. The firm-optimal segmentation, which divides the market into two nested segments, consistently harms consumers compared to uniform pricing. The consumer-optimal segmentation, which divides the market into a symmetric segment and a nested segment, sometimes leads to a Pareto improvement. Social surplus, if monotone in firm profit, is often maximized either by the firm-optimal or consumer-optimal segmentation.

Suggested Citation

  • Yanlin Chen & Xianwen Shi & Jun Zhang, 2025. "Welfare of Competitive Price Discrimination with Captive Consumers," Working Papers tecipa-790, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:tecipa-790
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    References listed on IDEAS

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    1. Nima Haghpanah & Ron Siegel, 2022. "The Limits of Multiproduct Price Discrimination," American Economic Review: Insights, American Economic Association, vol. 4(4), pages 443-458, December.
    2. Mark Armstrong & John Vickers, 2019. "Discriminating against Captive Customers," American Economic Review: Insights, American Economic Association, vol. 1(3), pages 257-272, December.
    3. Raith, Michael, 1996. "A General Model of Information Sharing in Oligopoly," Journal of Economic Theory, Elsevier, vol. 71(1), pages 260-288, October.
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    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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